Problem 6-4A (Part Level Submission) The management of Gresa Inc. is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost. The company requests your help in determining the results of operations for 2017 if either the FIFO or the LIFO method had been used. For 2017, the accounting records show these data: Inventories Purchases and Sales $20,000 Beginning (10,000 units) Ending (12,000 units) Total net sales (268,000 units) Total cost of goods purchased (270,000 units) $1,273,000 671,000 Purchases were made quarterly as follows. Quarter Units Unit Cost Total Cost 1 70,000 $2.30 2 2.40 $161,000 144,000 150,000 216,000 60,000 60,000 80,000 3 2.50 4 2.70 270,000 $671,000 Operating expenses were $150,000, and the company's income tax rate is 40%. (a) Your answer is correct. Prepare comparative condensed income statements for 2017 under FIFO and LIFO. GRESA INC. Condensed Income Statements For the Year Ended December 31, 2017 FIFO LIFO Sales Revenues 1273000 1273000 $ Cost of Goods Sold ! Beginning Inventory 20000 20000 Cost of Goods Purchased 671000 671000 Cost of Goods Available for Sale 691000 691000 Ending Inventory 32400 24600 Cost of Goods Sold 658600 666400 Gross Profit/ (Loss) 614400 606600 Operating Expenses 150000 150000 Income before Income Taxes 464400 456600 Income Tax Expense 185760 182640 Net Income /(Loss) 278640 273960 $ (b) Answer the following questions for management. (1) Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet? (2) Which cost flow method (FIFO or LIFO) produces the more meaningful net income? (3) Which cost flow method (FIFO or LIFO) is more likely to approximate the actual physical flow of goods? (4) How much more cash will be available for management under LIFO than under FIFO? $ (5) Will gross profit under the average-cost method be higher or lower than FIFO? Will gross profit under the average-cost method be higher or lower than LIFO? (b) Answer the following questions for management. (1) Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet? (2) Which cost flow method (FIFO or LIFO) produces the more meaningful net income? Averag-cost method LIFO method FIFO method (3) Which cost flow method (FIFO or LIFO) is more likely to approximate the actual physical flow of goods? (4) How much more cash will be available for management under LIFO than under FIFO? $ (5) Will gross profit under the average-cost method be higher or lower than FIFO? Will gross profit the average-cost method be higher or lower than LIFO
